EXHIBIT 7.2
PRO FORMA FINANCIAL INFORMATION
CALLAWAY GOLF COMPANY
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS
(UNAUDITED)
The following unaudited pro forma consolidated condensed balance sheet
reflects the September 30, 2003 balance sheet of Callaway Golf Company (the
"Company"), which includes the acquisition of TFGC Estate Inc. (f/k/a The
Top-Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc., the "Seller") in
a two step process. The acquisition of the domestic operations of The Top-Flite
Golf Company was completed on September 15, 2003 and the acquisition of the
international operations was completed on October 1, 2003. The pro forma balance
sheet at September 30, 2003 reflects certain assets and liabilities of the
international operations acquired on October 1, 2003 as if they were acquired on
September 30, 2003.
The following unaudited pro forma consolidated condensed statement of
operations for the nine months ended September 30, 2003 and the year ended
December 31, 2002 gives effect to the Company's acquisition of The Top-Flite
Golf Company as if it had occurred at the beginning of each period presented.
The Company's statement of operations for the nine months ended September 30,
2003 includes the two week period of operations for the domestic operations of
the Seller subsequent to the acquisition on September 15, 2003. The Seller's
statement of operations for the nine months ended September 30, 2003 and year
ended December 31, 2002 includes the domestic operations of the Seller from
January 1, 2002 to September 14, 2003 (the day prior to the date of acquisition)
and the international operations of the Seller for the nine-month period ended
September 30, 2003 and year ended December 31, 2002. Until September 15, 2003,
the Top-Flite golf business in the United States was operated as part of, and
was integrated with, the other businesses of Spalding Sports Worldwide. The pro
forma results of operations, therefore, are based upon an estimated allocation
of personnel and costs with regard to the manner in which the Top-Flite golf
business was structured and operated as part of Spalding Sports Worldwide. The
allocated personnel and costs are not necessarily indicative of the personnel
and costs that would have been included had the Top-Flite business been operated
as part of Callaway Golf Company since the beginning of the periods presented.
As a result, the pro forma results of operations are not necessarily indicative
of the results of operations for the periods presented had the acquisition been
completed at the beginning of the periods presented.
The financial statements should be read in conjunction with the notes to
the pro forma unaudited consolidated condensed financial statements, which
follow, the financial statements of the Company and related notes thereto (as
previously filed), and the financial statements of SHC Inc. and related notes
thereto, included herewith. A full determination of the allocation of the
aggregate acquisition costs will be made within twelve months of the effective
acquisition date, upon receipt of a final independent valuation analysis of
tangible and intangible assets. It is anticipated that the final allocation will
not differ materially from the preliminary allocation.
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CALLAWAY GOLF
COMPANY PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
SEPTEMBER 30, INCREASE/ SEPTEMBER 30,
2003 (DECREASE) 2003
------------- ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 72,835 $ $ 72,835
Accounts receivable, net 136,329 16,468 (a) 152,797
Inventories, net 141,174 9,035 (a) 150,209
Deferred taxes 34,531 34,531
Prepaid investment in Top-Flite International 29,954 (29,954)(a) --
Other current assets 11,002 11,002
--------- --------- ---------
Total current assets 425,825 (4,451) 421,374
Property, plant and equipment, net 194,044 4,494 (a) 198,538
Intangible assets, net 150,538 150,538
Goodwill 19,281 19,281
Deferred taxes 5,218 5,218
Other assets 16,266 16,266
--------- --------- ---------
$ 811,172 $ 43 $ 811,215
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 79,168 $ $ 79,168
Accrued employee compensation and benefits 28,425 28,425
Accrued warranty expense 13,615 13,615
Note payable, current portion 811 811
Long-term debt, current portion 400 400
Capital leases, current portion 196 43 (a) 239
Income taxes payable 34,452 34,452
--------- --------- ---------
Total current liabilities 157,067 43 157,110
Long-term liabilities:
Deferred compensation 8,204 8,204
Energy derivative valuation account 19,922 19,922
Long-term debt 4,617 4,617
Capital leases, long-term portion 211 211
Shareholders' equity:
Preferred Stock, $.01 par value -- --
Common Stock, $.01 par value 836 836
Paid-in capital 377,266 377,266
Unearned compensation -- --
Retained earnings 504,546 504,546
Accumulated other comprehensive gain 778 778
Less: Grantor Stock Trust held at market value (128,724) (128,724)
--------- --------- ---------
754,702 754,702
Less: Common Stock held in treasury, at cost (133,551) (133,551)
--------- --------- ---------
Total shareholders' equity 621,151 621,151
--------- --------- ---------
$ 811,172 $ 43 $ 811,215
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CALLAWAY GOLF TOP-FLITE GOLF PRO FORMA
COMPANY HISTORICAL COMPANY ADJUSTMENTS PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED INCREASE / NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003 (DECREASE) SEPTEMBER 30, 2003
------------------ ------------------ ----------- ------------------
Net sales ...................................... $ 667,430 $ 191,038 $ $ 858,468
Cost of goods sold ............................. 332,878 115,103 (2,514)(e) 445,467
--------- --------- --------- ---------
Gross profit ................................. 334,552 75,935 2,514 413,001
Operating expenses:
Selling ...................................... 149,527 68,964 (838)(e) 217,653
General and administrative ................... 43,154 23,837 (649)(b)
1,611 (d)
(838)(e) 67,115
Research and development ..................... 20,648 2,783 23,431
--------- --------- --------- ---------
Total operating expenses ................... 213,329 95,584 (714) 308,199
--------- --------- --------- ---------
Income from operations ......................... 121,223 (19,649) 3,228 104,802
Other income (expense), net .................... 1,470 3,612 5,082
Interest expense, net .......................... (125) (27,597) 27,391 (c) (331)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes ...........................
122,568 (43,634) 30,619 109,553
Provision for (benefit from) income taxes ...... 43,613 (6,803) 5,916 (f) 42,726
--------- --------- --------- ---------
Net income from continuing operations .......... $ 78,955 $ (36,831) $ 24,703 $ 66,827
========= ========= ========= =========
Earnings per common share:
Basic ........................................ $ 1.20 $ 1.01
Diluted ...................................... $ 1.19 $ 1.01
Weighted-average shares outstanding:
Basic ........................................ 65,936 65,936
Diluted ...................................... 66,295 66,295
The accompanying notes are an integral part of these financial statements.
37
CALLAWAY GOLF COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CALLAWAY GOLF TOP-FLITE GOLF PRO FORMA
COMPANY HISTORICAL COMPANY ADJUSTMENTS PRO FORMA
YEAR ENDED YEAR ENDED INCREASE / YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2002 (DECREASE) DECEMBER 31, 2002
------------------ ----------------- ----------- -----------------
Net sales ...................................... $ 792,064 $ 259,018 $ $ 1,051,082
Cost of goods sold ............................. 393,068 148,905 (3,015)(e) 538,958
----------- ----------- ----------- -----------
Gross profit ................................. 398,996 110,113 3,015 512,124
Operating expenses:
Selling ...................................... 200,153 91,108 (1,005)(e) 292,266
General and administrative ................... 56,580 31,264 2,156 (d)
(1,005)(e) 86,985
Research and development ..................... 32,182 3,964 36,146
Impairment charge on intangible assets ....... -- 18,431 18,431
Gain on early extinguishment of debt ......... -- (35,090) 35,090 (g) --
----------- ----------- ----------- -----------
Total operating expenses ................... 288,915 109,677 35,236 433,828
----------- ----------- ----------- -----------
Income (loss) from operations .................. 110,081 436 (32,221) 78,296
Other income (expense), net .................... 3,250 2,849 6,099
Interest expense ............................... (1,660) (37,852) 37,398 (c) (2,114)
----------- ----------- ----------- -----------
Income (loss) from continuing operations........
before income taxes ........................... 111,671 (34,567) 5,177 82,281
Provision for (benefit from) income taxes ...... 42,225 44,748 (54,883)(f) 32,090
----------- ----------- ----------- -----------
Net income from continuing operations .......... $ 69,446 $ (79,315) $ 60,060 $ 50,191
=========== =========== =========== ===========
Earnings per common share:
Basic ........................................ $ 1.04 $ .75
Diluted ...................................... $ 1.03 $ .74
Weighted-average shares outstanding:
Basic ........................................ 66,517 66,517
Diluted ...................................... 67,274 67,274
The accompanying notes are an integral part of these financial statements.
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CALLAWAY GOLF COMPANY
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of presentation
The accompanying pro forma unaudited consolidated condensed balance sheet
and statement of operations present the financial position and results of
operations of Callaway Golf Company (the "Company") and TFGC Estate Inc. (f/k/a,
The Top-Flite Golf Company, f/k/a Spalding Sports Worldwide, Inc.), after giving
effect to the acquisition of substantially all of the assets and assumption of
certain liabilities of The Top-Flite Golf Company. The acquisition of the
domestic operations of The Top-Flite Golf Company was completed on September 15,
2003, with the international operations acquisition completed on October 1,
2003.
On September 15, 2003, the Company completed the acquisition of
substantially all of the assets of The Top-Flite Golf Company (the "Seller") and
thereafter completed the acquisition of certain additional assets related to the
Seller's international operations (the "Acquisition"). The Acquisition was
consummated pursuant to the terms of the Asset Purchase Agreement between the
Seller and the Company, dated as of June 30, 2003, as amended (the "Asset
Purchase Agreement"). The purchase price was initially determined through an
arms-length negotiation between the parties and was subject to certain
contingencies, including the approval of the Acquisition by the U.S. Bankruptcy
Court. In connection with the approval process, the court approved the Company
as the "stalking horse" bidder, permitting other qualified bidders to submit
higher and better bids for the subject assets than the Company's bid. The
court-ordered auction was conducted on September 3, 2003. The Company made the
prevailing bid which was approved by the bankruptcy court on September 4, 2003.
Pursuant to the court-approved bid, the Company agreed to acquire the
Seller's assets for approximately $174,363,000 (approximately $169,294,000 cash
and the assumption of approximately $5,069,000 of debt) and the assumption of
certain liabilities. The cash portion of the purchase price was subject to
adjustments for the amount of inventory and accounts receivable delivered at
closing. The Seller delivered inventories, accounts receivable, fixed assets
(primarily plant and manufacturing equipment), and all of Seller's golf patents,
trademarks and intellectual property. Based on the actual amount of inventories
and accounts receivable delivered, and certain other adjustments, the cash
portion of the purchase price was adjusted downward by approximately
$10,149,000. Accordingly, the adjusted cash portion of the purchase price was
approximately $159,145,000. The purchase price is subject to further adjustment
based upon the confirmation of the value of inventories and accounts receivable
acquired in connection with the Acquisition.
The Company paid the cash purchase price for the Acquisition out of cash
on hand. The Company intends to continue the U.S. and foreign operation of the
acquired golf business, including the use of acquired assets in the manufacture
of golf balls and golf clubs and the commercialization of existing TOP-FLITE(R),
STRATA(R) and BEN HOGAN(R) brands, patents and trademarks.
The Acquisition was accounted for as a purchase in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations." Under SFAS No. 141, the estimated aggregate cost of the acquired
assets is 185,735,000, which includes cash paid ($159,145,000) transaction costs
(approximately $6,002,000) and assumed liabilities (approximately $20,588,000).
The estimated fair value of the assets exceeded the estimated aggregate
acquisition costs. As a result, the Company was required to reduce the carrying
value of the acquired long-term assets on a pro rata basis. A full determination
of the allocation of the aggregate acquisition costs will be made within twelve
months of the effective acquisition date, upon receipt of a final independent
valuation analysis of tangible and intangible assets. It is anticipated that the
final allocation will not differ materially from the preliminary allocation. The
preliminary allocation, which includes the international operations of the
Seller, is as follows (in thousands):
Assets Acquired:
Accounts receivable, net ....................................... $ 45,186
Inventory, net ................................................. 34,659
Other assets ................................................... 682
Property and equipment, net .................................... 56,786
Intangible assets, net ......................................... 48,465
Liabilities Assumed:
Current liabilities ............................................ (15,760)
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Long term liabilities ......................................... (4,871)
---------
Total net assets acquired ................................... $ 165,147
=========
Note 2 - Balance Sheet Pro Forma Adjustment
(a) To record the assets and certain liabilities of the Seller's international
operations acquired on October 1, 2003. The purchase price was recorded as
a prepaid asset by the Company as of September 30, 2003.
Note 3 - Statement of Operations Pro Forma Adjustments
(b) To eliminate nonrecurring transaction costs incurred by the Seller.
(c) To eliminate nonrecurring interest expense of the Seller.
(d) To record amortization of intangible assets related to player contracts,
technology, license agreements and distributorships. Amounts are based on
results derived from a preliminary independent valuation analysis. It is
anticipated that the final amounts will not differ materially from the
preliminary amounts.
(e) To record decrease in depreciation expense on Top-Flite Golf Company
property and equipment. Amounts are based on results derived from a
preliminary independent valuation analysis. It is anticipated that the
final amounts will not differ materially from the preliminary amounts.
(f) To record the tax effect of pro forma adjustments (at statutory rates -
39%).
(g) To eliminate the gain on early extinguishment of debt in connection with
the April 2002 recapitalization
40